LLC changes coming Jan. 1

Act's author says new law has wide range of benefits

Earlier this year, Gov. Lynch signed into law a major revision of the New Hampshire Limited Liability Company Act. The title of the new act is "The Revised New Hampshire Limited Liability Company Act" and the legislation is one that tax lawyer John Cunningham knows well because he led the committee that helped draft the new act.

Earlier this year, Gov. Lynch signed into law a major revision of the New Hampshire Limited Liability Company Act. The title of the new act is "The Revised New Hampshire Limited Liability Company Act" and the legislation is one that tax lawyer John Cunningham knows well because he led the committee that helped draft the new act.

Cunningham is an LLC expert. More precisely, he is a passionate expert and one of the founding fathers of LLC legislation in New Hampshire. He was a member of the committees that drafted the original version of the New Hampshire Limited Liability Company Act in 1993. "The great thing about New Hampshire is that you can be a small frog but the pond here is also small," he said. "If you come up with a good idea in New Hampshire, you can do something."

Cunningham then helped write the major amendments to that act in 1997. He's an evangelist when it comes to LLCs — a hybrid business structure that protects members from personal financial liability and allows them maximum flexibility. He has even written "John Cunningham on New Hampshire's New LLC Act," an 11-chapter, 150-page breakdown of the law. For his efforts, the New Hampshire Business & Industry Association recognized Cunningham with its annual "Above and Beyond" award earlier this year.

"I was kind of looking for a field that was new and one in which I could be creative and figure out the law on my own," said Cunningham about his LLC quest, which began in 1990 when he was working for the firm of Orr & Reno. "I thought it was possible I could get wealthy from my expertise. I was wrong about that, but I have been very passionate about them."

Cunningham is of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, and he is focused on forming LLCs, converting corporations and other non-LLC entities to LLCs, and handling other matters involving LLCs. Under the LLC acts of California, Delaware, Massachusetts, New Hampshire and other states, Cunningham estimates he has formed hundreds of LLCs, with initial capitalizations ranging from a few thousand dollars to $600 million and with memberships ranging from one to more than100.

Small business boon

LLCs range in size — including one as large as the reformed Big Three automobile manufacturer Chrysler LLC — and differ in statute from state to state. About 6,000 LLCs are formed every year in the state and of the estimated 47,000 LLCs registered in New Hampshire, Cunningham said the average LLC size is three members, but almost half are single-member (person or company) size. This is why Cunningham said the new act targeted the needs of small businesses.

In 2009, a political firestorm erupted about the state's extension of the 5 percent Interest and Dividends Tax to distributions from LLCs (and other types of partnerships and associations); and in 2010, the Legislature repealed the extension. Cunningham said the current law has "nothing to do with taxes" but was a necessary update to make the statute even more user- and small-business friendly.

"In my gut, I hate legalisms that make understanding these laws difficult. The new act is written in English, or at least my drafting committee and I tried to write it in English. For lawyers, writing in English can be hard work," he said. "I give the old act a gentlemen's B and the new one an A-plus for making it easier to understand and being better for small businesses."

During the committee's drafting process for the new act, which began in early 2011, Cunningham said he frequently "field-tested" new language with clients to get their feedback. In addition to clearer language and a focus on small business, Cunningham says there are other reasons to applaud the new act, which goes into effect on Jan. 1. Due to a grand-fathering clause, current LLCs can choose the status quo or convert to the new guidelines, but all LLCs must be converted by Jan. 1, 2014.

Filling the gaps

There were at least 19 important LLC "statutory-gap issues" in the 1993 and 1997 acts, which Cunningham believes were potentially important to New Hampshire business owners. He said the new act addresses all 19 of these issues, which include comprehensive fiduciary provisions and what he calls "simply crazy or downright scary" rules, which, for example, hamper the flexibility of LLC members to fire bad managers or even to distribute LLC cash to a member to help them pay taxes on their shares of LLC profits. "In the new act, all of these crazy and scary rules are gone," Cunningham said.

The earlier LLC statute versions were influenced by similar laws in Wyoming and Delaware. But the almost two-decade long evolution of the LLC law in New Hampshire has put the state in an enviable position. Cunningham said it's not being immodest to say that "we believe this is the best and most comprehensive LLC law in the country."

Find out more about John Cunningham, LLCs and his new book, which he said will soon be available for free downloading at www.johncunninghamonnhllcs.com.